Exam 29: Credit Derivative Products

Which of the following is not one of the three "C"s of lending in banking?

The "base" correlation in a CDO is

Today, investor A buys protection on a first-to-default basket, while investor B buys protection via Credit Default Swaps on each individual name in that basket. All contracts have the same maturity. Suppose that at maturity, it turns out that only one name out of the basket has defaulted then,

Suppose that an investor has purchased $250 million of protection on the iTraxx Europe which is an equally-weighted index composed of 125 European investment-grade names. If one of the names in the index were to default, the protection seller compensates the buyer for the loss-given-default on that name on a notional of _________________, the index continue to trade on _______________ names; and all subsequent premium payments are based on a notional of______________.

Consider a total return swap (on a credit-risky bond) of total returns against Libor. The receiver of total return in this swap has a position that is equivalent to

Credit risk in bonds involves uncertainty about whether the bond will default (default risk), and uncertainty about the value of the bonds when they default (recovery risk). In order to profit from a view that default risk will worsen, while not taking a view on recovery risk, you would most prefer to

In a typical Credit Linked Note structure, a special-purpose vehicle (SPV) issues notes tied to the credit performance of a reference obligation. Buyers of these notes are protection on the reference obligation and are the risk of the SPV mismanaging the collateral

Which of the following credit derivatives is not a pure credit risk instrument, i.e., is a bet on more than just credit risk?

Which of the following factors contributed to the the substantial growth in the market for credit derivatives in the 2000s?

A $100 million CDO has tranches running from loss ranges of: 0-3%, 3-7%, 7-10%, 10-15%, and greater than 15%. The 7-10% tranche may be stated equivalently as

What action is involved in constructing a synthetic CDO?

The fair price of a CDS contract on a reference bond is equivalent to that of a spread on a floating-rate bond issued by the same entity as the reference bond and that

Suppose an investor wishes to sell protection on $10 million of the CDX Index where the fixed spread is 100 bps. If the current spread on the index is 150 bps, then the investor will receive

Bank A is able to raise funds at Libor + 10 bps. Bank B does so at Libor + 40 bps. Bank A buys a credit risky asset returning Libor + 100 bps, and then A and B enter into a total return swap (TRS) where A pays B the total return on the asset in return for Libor + $y$ bps. What range of basis points $y$ would be acceptable to both parties in the contract?

Assume that the CDX-iTraxx index has 125 names in it, for a total notional of $100,000,000. If the recovery rate on default of any name is 40%, at least how many names must default for the 3-7% tranche of the CDO to be wiped out?

A collateralized default obligation (CDO) is a pool of securities (collateral) whose cash flows are tranched and sold to investors who take different levels of credit loss in the portfolio. Which of the following is the least likely to be seen in a the collateral of a CDO.

Bank A holds a credit risky asset on its balance sheet. It enters into a total return swap (TRS) referenced to this asset with hedge fund B to pay the total return to B and receive Libor in return. Under what scenario does bank A bear credit risk on the reference asset this contract?

A first Ðto-default (FTD) basket pays off when the first default occurs in the given basket of "names." The spread on a first-to-default basket is:

The CDS-Bond basis is the difference in credit spreads in the CDS and bond markets, i.e., CDS spread minus the bond spread. Which of the following scenarios will make the basis greater, i.e., move it in the positive direction?

Bank A is able to raise funds at Libor. Bank B does so at Libor + 30 bps. Bank A buys a reference credit risky asset returning Libor + 70 bps, and then, A and B contract with each other on a credit swap (CDS) where A buys protection on the reference asset from B for $y$ bps. What range of basis points $y$ would be acceptable to both parties in the contract?